Australia and Japan Conclude Free Trade Deal

Banzai! Eureka! The emotion was likely similar on both sides of the negotiating table as U.S. allies Japan and Australia sealed a trade deal Monday evening, after what Australia’s trade minister Andrew Robb described as “seven long years of negotiation.”

Visiting Tokyo as part of an East Asia tour encompassing Japan, South Korea and China, Australian Prime Minister Tony Abbott hailed the “historic” trade deal with the nation’s second-largest trading partner as “good for the Australian economy, good for jobs, good for farmers and good for consumers.”

Somewhat fittingly, the agreement (formally known as the Japan-Australia Economic Partnership Agreement, or JAEPA), was sealed by Japanese Prime Minister Shinzo Abe, whose grandfather, Nobusuke Kishi, had signed a landmark 1957 commerce agreement with Australia.

At a press conference held Monday evening in Tokyo, the Japanese leader said: “I’m really glad that the broad agreement was reached in the [EPA] negotiations. The Japan-Australia EPA is an extremely important framework to promote trade and investment.”

Marking his second major trade deal after last year’s pact with South Korea, Robb said it had been reached after “very tough negotiation, but it’s been conducted with a lot of goodwill on both sides.” Abbott claimed the deal would deliver cheaper Japanese consumer products to Australians and more affordable Australian food to Japan, noting that Australia had “broken new ground as the first major agricultural exporting economy to conclude such a liberalizing agreement with Japan.”

Cheaper Cars, Beef

Under the deal, Australia will eliminate 5 percent tariffs on Japanese electronic and household goods, while a 5 percent car tariff will end within three years, which would theoretically reduce the cost of a A$30,000 ($28,000) Japanese car by an estimated A$1,500. In addition, the threshold for Australian regulatory review of Japanese private investment will be raised to more than A$1 billion from A$248 million, giving Japanese investors the same rights as South Korean companies under the trade deal with Seoul.

For Australia, the prize was significant cuts to Japanese beef tariffs, with a 38.5 percent tariff on frozen beef to drop to 19.5 percent over 15 years, and a similar tariff on fresh or chilled beef to decline to 23.5 percent over the same period. According to the Australian beef industry, the tariff cuts could boost exports to its largest export market by A$5.4 billion over 20 years.

Australian cheese exporters also gained with duty-free cheddar exports to grow to 27,000 metric tons over 20 years, with other concessions for horticulture, seafood, sugar and wine. Australian services exports in such fields as education, financial, legal and telecommunications also obtained increased access to the world’s third-largest economy.

While lower tariffs are expected to cost “hundreds of millions in lost revenue” to Canberra, such losses are forecast to be “more than offset by the boost in growth and exports,” according to the Australian Financial Review.

A joint economic study conducted in 2006 estimated potential trade gains of A$68 billion to Japanese consumers and A$19 billion to Australians over a 20-year period, with GDP increasing by up to 1.79 percent for Australia and 0.13 percent for Japan. Two-way trade totaled nearly A$70 billion in fiscal 2013, with Australia’s exports of minerals, energy and beef making it Japan’s third-largest source of imports, while Australia serves as Japan’s 10th-largest export market, principally in auto-related products.

Best Deal Ever?

The new landmark agreement described as Japan’s “best deal ever” with an agricultural exporter was reportedly concluded after six months of “extremely rigorous” negotiations, prompted in part by Japan’s push to join the Trans-Pacific Partnership (TPP) talks.

Japan imports 60 percent of its food and previous trade deals have excluded agricultural products including beef, wheat and rice, partly due to strong opposition from the farmers organization, JA Group.

Importantly for Australian exporters, the agreement’s “most favored nation” status ensures an automatic upgrade should Japan strike a better deal with another country such as the United States.

However, Australian farmers expressed mixed views on the outcome, with lobby group National Farmers’ Federation (NFF) saying the results were mixed. “We recognize the historical significance of the agreement. However, we are disappointed with the overall outcomes for agriculture with a number of sectors facing marginal improvements or limited commercial gains,” NFF president Brent Finlay said. While noting the deal’s benefits for Australian beef, seafood and wine, Finlay added, “The agreement does not improve – or marginally improves – market access and terms of trade for a number of sectors such as dairy, sugar, grains, pork and rice.”

Opposition agriculture spokesman, Joel Fitzgibbon welcomed the deal, but said the Labor party was worried by the “very slow” reduction in tariffs. ‘‘I am concerned that agriculture has been abandoned so that Tony Abbott can sort of steal that trophy and make his announcement while he’s travelling,’’ he told ABC radio.

But after seven years of talks, Melanie Brock, chair of the Australian and New Zealand Chamber of Commerce in Japan, could not hide her delight, giving the Australian negotiators “10 out of 10” for the outcome. “People don’t understand the ramifications but this is as significant as the 1957 commerce agreement. The fact that Japan has reached an accord with a major agricultural exporter like Australia is significant, and it might not have been able to do so if there weren’t strong bonds between both sides,” she told The Diplomat. “I understand the frustrations felt by certain sectors, but in the early days of discussions there was little intent on the Japanese side to deliver much at all [on agricultural tariffs]. Seven years is a long time, but I think we’ve got the best deal that we ever could.”

Brock said she expected the agreement would increase investment between the two nations, including more joint venture and third-country partnerships. The Australian trade consultant said the agreement reflected the “reform-minded” nature of the Abe administration, with potential ramifications for the TPP. Japanese media and businesspeople also expressed optimism over the deal, with headlines in major dailies Tuesday.

Japanese entrepreneur Ko Nagata, founder of the Queensland Business Centre in Tokyo, told The Diplomat that the trade deal would have an important headline effect for businesses in both countries.

“Japan already has over A$60 billion invested in Australia, and this deal should spur Japanese investment in new areas such as services, as well as the traditionally strong sectors of resources, agriculture and property,” said Nagata, managing director of Global Sky Group. “The 2020 Tokyo Olympics and Japan’s economic revival under ‘Abenomics’ are leading to a revival of foreign investor interest in Japan. We’re very excited about exploring further opportunities with Australian companies at the Queensland Business Centre, serving as a gateway to Japan’s biggest market.”

As previously reported by The Diplomat, the pact should be officially signed when Abe visits Australia in July, coming into effect by the end of 2014.

For Abbott, the Japan deal marks the second of three trade agreements pledged with major trading partners China, Japan and South Korea within a stated deadline of October 2014. The Korean free trade agreement was to be signed Tuesday in Seoul, leaving only the potentially tougher deal with Beijing still outstanding.

Yet for Abe, the Australia pact has demonstrated to internal critics the prime minister’s reform credentials and willingness to battle even elements of his own political constituency to boost the nation’s growth prospects, including tackling the tougher TPP negotiations. The broader significance of the talks was reflected in a commitment by both sides for stronger defense ties, including joint development of weapons and equipment, a move that further cements the two U.S. allies’ regional interests.

But Monday’s theme was summed up by Abbott: “JAEPA sends a strong message to Japanese investors that Australia is open for business.” Abe could have justifiably said the same.